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Qualified Settlement Funds
Qualified Settlement Funds
Why are you hearing more about Qualified Settlement Funds
and how will they help you and your clients?
Due to myriad post-settlement issues facing both 1. Obtain a full release of all claims that arose
plaintiffs and defendants, today’s settlements from a specific cause of action—Pay and walk
are becoming ever more complex. Prior to 2003, away
settlements were fairly simple agreements made 2. Receive a current year tax deduction for the
between two or more parties involved in some sort payment made into a QSF
of legal dispute; such is not the case today, espe- 3. Indemnity in certain cases from any and all
cially with respect to personal injury settlements.1 health care lien resolution liability that might
It seems like a new wrinkle is being added to exist in connection with a health care provid-
personal injury settlements each year, and this er’s direct right of reimbursement from the
year is no different with the implementation settlement proceeds.
of the Medicare Medicaid SCHIP Extension
Act of 2007 (MMSEA).2 Therefore, attorneys Plaintiffs benefit from establishing a QSF, because
must constantly be aware of the increasing ob- it allows them to:
ligations being placed on both them and their 1. Obtain a settlement that, upon payment
clients in order to achieve a settlement that into the QSF, is free and clear of any of the
is not only advantageous to both the plaintiff defendant’s creditors
and defendant, but also one that satisfies any 2. Begin immediately earning interest on the set-
and all of the subrogated interests or reim- tlement proceeds that are paid into the QSF
bursement claims that may also possess an 3. Avoid constructive receipt of the recovery
By Peter H. interest in a settlement. Fortunately, Congress until any and all Medicare, Medicaid and/or
Wayne IV provided a mechanism with which to simplify the private health liens that may exist against
settlement process for all parties involved in litiga- settlement proceeds are properly verified and
tion when they established Treas. Reg. §1.468B-1 resolved
Qualified Settlement Funds (QSF).3 4. Obtain the amount of time to properly evalu-
ate client’s needs based benefits, and in turn,
Qualified Settlement Funds avoid any associated liability for failing to
While QSFs first became available in 1992, it inform a client about how settlement monies
appears that many attorneys are just now becom- can affect those benefits
ing aware of the benefits they can provide both 5. Evaluate the need for, and benefits derived
plaintiffs and defendants. In essence, a QSF from, establishing a Special Needs Trust4
provides all the parties involved in litigation the 6. Allow the proper time to fully consider
opportunity to settle a case long before the post- Structured Settlements5 and other important
settlement subrogation issues are fully resolved financial and health care planning options
and the plaintiff’s receipt of settlement planning is 7. Disburse the attorneys’ fees immediately
complete. upon the presentation of the applicable con-
QSFs benefit both sides and therefore pro- tingency fee agreement between plaintiff and
mote faster settlement. By establishing a QSF, his or her counsel6
defendants are able to: 8. Properly evaluate the need for and/or the al-
location of settlement proceeds to be placed
Peter Wayne serves as a Kentucky-licensed settlement planning in a Medicare Set Aside7
consultant for FORGE Consulting, LLC and is also the compa- 9. Provide for the allocation of the gross settle-
ny’s general counsel. Peter may be reached at (502) 595-8600 or ment recovery among plaintiffs after settle-
by email at pwayne@forgeconsulting.com. ment without further delay.
26 The Advocate
So how can a QSF be established? a case for cash and then sort out the options and/or assisting them with
Answer—it is simple. Congress only set various post-settlement obligations as- verifying and preserving their govern-
forth three requirements for establish- sociated with a settlement without the ment benefits could be a dereliction
ing one. First, the plaintiff or defen- stress of litigation.13 of that duty. For example, various
dant must motion a court to establish A QSF can also serve as a case courts have been very straightforward
a QSF and to assume jurisdiction over specific insurance policy for each party, with their position on the importance
its assets.8 Second, the QSF must be because the QSF documents can of structured settlements and Spe-
established to resolve or satisfy “one stipulate that the QSF Administrator14 cial Needs Trusts and their ability to
or more claims against the settle- is ordered to fully address and resolve help preserve a client’s government
ment.”9 And third, the QSF must be any and all subrogated interests that benefits. In Board of Overseers of the
a fund, account, or trust, such that its may possess a right of recovery from Bar v. Brown,15 a court suspended an
assets are segregated from other assets the settlement proceeds. Addition- attorney’s license for failing to pre-
of the defendant(s) paying into it.10 ally, said Administrator or some third serve a client’s government benefits
party with whom the Administrator and not drafting a Special Needs
Liability Protection? contracts can provide indemnification Trust. In both New York and Texas,
Almost every settlement today to all parties for liability related with attorneys found themselves in litiga-
involves some aspect of health care liens the third party has been engaged tion for either failing to fully educate
subrogation. That said, the laws to resolve. 42 CFR §411.24 sets forth a client about the ability to structure
that dictate how these issues are to the law that Medicare has a right of their settlement or for misrepresent-
be properly resolved are constantly action to recover its payments from ing the cost of a structured settlement
changing, and when coupling together any entity, including a beneficiary, annuity.16
the constantly changing laws and the provider, supplier, physician, attorney, These cases should stand as
liability that is associated with them, state agency or private insurer that has evidence to the importance of proper
both plaintiff and defense attorneys received a third party payer defendant settlement planning and the need to
are wise to pay close attention. For ex- and/or can recover directly from the fully address a client’s post-settlement
ample, the MMSEA, signed into law said third party should their lien not needs and obligations. A QSF pro-
by President George W. Bush in 2007, be fully resolved. In light of this poten- vides an attorney with the opportunity
requires that defendants report to the tial liability, if a case is going to settle, to educate a client about settlement
Secretary of the Health and Human why not settle it in such a way that en- planning options. In turn, clients
Services specific information about sures both attorneys and their clients are understand how the settlement will
a Medicare beneficiary when they complying with all applicable laws, while affect his or her needs-based benefits
settle a claim made by a beneficiary at the same time ensuring that the final or future financial and health care
who brought a cause of action against payment or receipt of settlement proceeds needs. Furthermore, a QSF will allow
them.11 This law has sparked serious are free and clear of the potential liability a plaintiff to settle the underlying
confusion over what role a defendant that might arise under 42 CFR §411.24? tort action and then focus on meet-
now plays in establishing a Medicare A QSF can aid in the settlement process ing and speaking with the appropriate
Set Aside when a Medicare benefi- and protect you and your client. experts, whether they are a structured
ciary is a claimant in a settlement.12 settlement consultant, special needs
Please note, while this article’s intent Settlement Planning planning attorney and/or Medicare
is not to focus on the proper satisfac- Whether a client is on govern- Set Aside evaluation and administra-
tion of a plaintiff’s and defendant’s ment benefits or would like to further tion company. Without a QSF, an
obligations to Medicare, it is impor- evaluate his or her structured settle- attorney must balance a client’s tort
tant to highlight that a QSF can pro- ment options, a QSF can assist as a interests and simultaneously manage
vide the ability for the “tort” aspect of settlement vehicle that allows a client the coordination of the settlement
a matter to be resolved and then for to maximize the settlement recovery planning experts so that any settle-
the parties to ensure that each party’s by exploring the full array of financial ment proceeds, when received, do not
respective obligations under the law options available. As attorneys, we jeopardize client’s health care cover-
are being addressed and addressed by must provide our clients with the best
the appropriate party. In essence, the representation possible and failing to
law can provide the ability to settle inform them about their settlement Continued on following page
September/October 2009 27
Qualified Settlement Funds
Continued from previous page Congress added Section 468B to InsRep/04_Whats_New.asp for more
the Internal Revenue Code. Section information.
age or eliminate their financial plan- 468B regulates the establishment and 12 The MMSEA was announced, some
administration of Designated Settle- opined that Medicare would now
ning options. ment Funds or “DSFs.” Not only did begin requiring liability settlements to
Regardless of whether you DSFs arise to assist in class action include Medicare Set Asides (MSA)
represent plaintiffs or defendants, lawsuits, but also to allow insured and starting July 1, 2009 (original timeline)
now is the time for you to begin us- self-insured defendants to determine and/or that such guidance is expected
when their settlement payments are shortly from CMS. That view of the
ing QSFs, as there is no better way
deducted. Once DSFs were available, it MMSEA is not accurate. CMS has
to insulate yourself and your clients was only a matter of time before their not offered any formal guidance on the
from the post-settlement liability that use was extended. That extension came issue of liability MSAs and it does not
surrounds settlements today. While from 1992 Treasury Regulations, which appear that such guidance will be com-
defendants can obtain their release, became effective on January 1, 1993. ing in the near future. Moreover, CMS
4 42 U.S.C. § 1396p (d) (4). repeated in its many recent “town hall”
current year tax deduction and,
5 The Qualified Settlement Fund (QSF) teleconferences that the MMSEA’s
potentially, indemnification from the may enter into a Settlement Agreement settlement reporting requirements
improper resolution of a health care with the plaintiff(s) and can enter into a are not intended to replace or change
lien, plaintiffs gain the ability to settle Qualified Assignment, pursuant to Rev. CMS’s existing recovery practices, in-
their case, pay their attorneys fees and Proc. 93-34. cluding MSA guidance. The MMSEA
6 This assumes that the underlying cause User Guide emphasizes the fact that
then take the time necessary to fully
of action does not involve a minor, es- Section 111 did not change or remove
evaluate all of their post-settlement tate or incompetent individual in which any existing Medicare Secondary Payor
obligations and receipt of settlement court approval would be required (MSP) rules, but adds to existing MSP
options. It is not very often that Con- before any disbursements are made. requirements. For more information on
gress provides a tool that allows for 7 Section 1862(b)(1) of the Social Secu- this subject, visit the Garretson Firm
rity Act (42 USC §1395y(b)(1); “Mak- Resolution Group’s library at
all interested parties to benefit from ing Sense of Medicare Set Asides,” www.garretsonfirm.com.
its use, but a QSF is just that—The Trial, Matthew L. Garretson, Esq. May 13 Please note that a QSF does not buy
Ultimate Settlement Device. 2005. a defendant more time to report the
8 Often the court a particular cause of case to Secretary of Health and Hu-
_______________ action is in front of is the court that man Services as required by §111 of
establishes a QSF, but it need not be. the MMSEA. A defendant must still
1 Medicare’s conditional payment recov- 9 There is significant debate over report the settlement at the time they
ery rights were established on Decem- whether or not a single claimant QSF execute the settlement agreement with
ber 5, 1980, but it was not until 2003 constitutes constructive receipt of the the plaintiff and not at the time the
with the enactment of the Medicare settlement monies paid into it, which proceeds are disbursed from the QSF.
Modernization Act, specifically §301 in effect eliminates a majority of the 14 This author is familiar with firms that
of the Act, that additional enforcement benefits derived from establishing one offer both QSF administrative services
provisions were added to the Medicare for a plaintiff. Therefore, until the IRS and lien resolution services, such that
Secondary Payer Act. The new provi- rules on whether or not a single claim- one entity can administer the QSF and
sions placed the onus on plaintiffs and ant QSF can be established this Author ensure that each subrogated interest is
their attorneys to comply with the laws recommends refraining from doing it. fully and properly resolved.
the set forth Medicare’s position as the 10 Treas. Reg. 1.468B-1(c). 15 Board of Overseers of the Bar v. Brown
payer of last resort. 11 The MMSEA Statute provides a July case, 2002 Me. Lexis 190 (2002).
2 MMSEA Amended Section 1862(b) 1, 2009 starting date, but as of May 16 Lyons v MMIA 730 N.Y.S.2d 345;
of the Social Security Act (42 USC 11, 2009 CMS extended this deadline Grillo v Pettiete et al. Cause No.96-
1395y(b)) by adding new reporting for settlements, judgments and other 145090-92 and Grillo v Henry Cause
requirements for defendants to inform one-time payments to January 1, 2010 No. 96-167943-96, 96th District
the Secretary of Health and Human in order for applicable defendants to Court, Tarrant County, Texas.
Services of certain information regard- be compliance with the law. Informa-
ing settlements involving Medicare tion relating to Ongoing Responsibility
Beneficiaries. for Medicals must still be reported if
3 The framework for the QSF was it occurs on or after July 1, 2009. See
created by Congress in 1986 when http://www.cms.hhs.gov/Mandatory-
28 The Advocate
